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Components of the Bid‐Ask Spread and the Statistical Properties of Transaction Prices

Components of the Bid‐Ask Spread and the Statistical Properties of Transaction Prices ABSTRACT The bid‐ask spread can be decomposed into two parts: one part due to asymmetric information and the other part due to other factors such as monopoly power. The part due to asymmetric information attenuates statistical biases in mean return, variance, and serial covariance. Thus, using spread data to adjust for biases in return moments requires knowing not only the spread but the composition of the spread. Furthermore, any spread‐estimation procedure using transaction prices must estimate two spread components. On the other hand, the appropriateness of some previously suggested statistical corrections is independent of the spread composition. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Components of the Bid‐Ask Spread and the Statistical Properties of Transaction Prices

The Journal of Finance , Volume 42 (5) – Dec 1, 1987

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References (17)

Publisher
Wiley
Copyright
1987 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1987.tb04367.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The bid‐ask spread can be decomposed into two parts: one part due to asymmetric information and the other part due to other factors such as monopoly power. The part due to asymmetric information attenuates statistical biases in mean return, variance, and serial covariance. Thus, using spread data to adjust for biases in return moments requires knowing not only the spread but the composition of the spread. Furthermore, any spread‐estimation procedure using transaction prices must estimate two spread components. On the other hand, the appropriateness of some previously suggested statistical corrections is independent of the spread composition.

Journal

The Journal of FinanceWiley

Published: Dec 1, 1987

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